A software company valuation depends on what the company sells: subscriptions, which are valued on recurring revenue as a SaaS company is; licences and services, which are valued on earnings as a service business is; or a product that is not yet earning, which is valued by its round. How to value a software company is first the question of which of those it is, and then the arithmetic at the multiple the owner enters. This page works the earnings method on the hub's example, says how tech company valuation differs when the revenue is recurring, and what the buyer asks about the code, the contracts and the team; the free tools on this site do the arithmetic from your own figures, with no account, and publish no multiple.
How to value a software company on its earnings
A software company that sells licences, implementations and support is valued on its discretionary earnings, the profit plus the owner's salary, benefits, interest, depreciation and one-off costs; $180,000 on the hub's example. Value is that times the multiple you enter, $450,000 at 2.5, and there is little inventory to add; the equipment is modest and added at agreed value. The owner's own engineering and sales time is the add-back and the replacement cost is the counter, and the Bureau of Labor Statistics' occupational wage data is where a market salary for the replacement is read. The small business valuation tool on this site works this method.
Tech company valuation when the revenue is recurring
A technology company whose revenue is subscriptions is valued as a SaaS company: annual recurring revenue times the multiple you enter, with growth, retention, margin and concentration as the facts behind the multiple, and the SaaS company valuation guide on this site says when a buyer will use that method over the earnings one. Valuing tech companies with mixed revenue, some recurring and some services, means splitting the two and valuing each on its own method, then adding, because a buyer will not pay a revenue multiple for services revenue that has to be resold every year. The hub publishes no multiple for either; the tools take the one you enter.
How are tech companies valued when they are not yet earning
By the round. A technology company raising money before it earns is valued by the amount raised for the equity given: $500,000 for 20% is a $2,500,000 post-money and a $2,000,000 pre-money on the hub's example, with the founders and earlier holders keeping 80%. The free startup valuation tool on this site works that arithmetic, and the SEC's Regulation D pages, linked below, describe the exemption most such rounds are sold under. Tech valuations at that stage are implied by the deal rather than derived from the books, and knowing the arithmetic is what lets a founder read a term sheet's percentage as dollars.
The code, the contracts and the team: what the buyer asks before the multiple
Whichever method applies, a buyer of a software company asks three questions before entering a multiple: who owns the code, and is every contributor's assignment on file; what do the customer contracts say about assignment, term and termination; and which of the team will stay, on what terms. Those answers move the multiple more than the arithmetic does, and an owner who has them on one page enters a multiple with a reason. The report tool on this site turns two or three multiples into a range with a midpoint, and the paid plan files each valuation against the company and the date.
Questions people ask about software company valuation
How is a software company valued?
By what it sells: subscriptions on recurring revenue times the multiple you enter, licences and services on discretionary earnings times a multiple, and a pre-revenue product by its round. $180,000 of earnings at 2.5 is $450,000; $500,000 for 20% is a $2,500,000 post-money.
How are tech companies valued differently from other businesses?
Recurring revenue is valued on a revenue multiple that prices growth, and pre-revenue companies by the round; services revenue is valued on earnings like any business. Mixed companies split the two.
What does a buyer ask before setting a multiple?
Who owns the code and whether every assignment is on file, what the customer contracts say about assignment and termination, and which of the team stays. Those answers move the multiple you enter.